JUDGMENT
A.S. Supehia, J. – By way of present writ petition, the petitioners have prayed for quashing and setting aside the impugned Show-Cause Notice dated 14.12.2018 and impugned order dated 31.12.2018 passed under Section 179 of the Income Tax Act, 1961 (for short ‘ the Acf) and the impugned Notice of demand under Section 156 of the Act.
2. The Coordinate Bench while issuing the Notice and granting the ad-interim relief vide order dated 31.01.2019 had specifically recorded contentions made by the learned Counsel appearing on behalf of the petitioners to the extent that the petitioners were granted short time in filing the reply i.e. less than two days to the Show-Cause Notice dated 14.12.2018, as they had received the said Notice belatedly. The other ground canvased and recorded in the order is related to the company in question, is that it is a public limited company and not a private limited company, hence, the jurisdiction under Section 179 of the Act could not have been invoked was also recorded.
2.1 So far as the first contention regarding less than two day’s time, available for the petitioners to file their reply to the impugned ShowCause notice, we have noticed that the petitioners have categorically made such statement at paragraph no. 5 of the writ petition. The averments made at paragraph no.5 reflect that the petitioner nos.1 and 2 had received the Show-Cause Notice issued under Section 179 of the Act on 22.12.2018, whereas, no notice have been received so far as petitioner nos. 3 to 5 are concerned, for the A.Y 2008-2009 and A.Y 2011-2012. This assertion made by the petitioners in paragraph no. 5 has not been dealt in the affidavit in reply filed by the respondent and the same remains uncontrovered. Thus, the petitioners who were supposed to file their reply by 24.12.2018 before 10:30 p.m. as mentioned in the impugned Show-Cause Notice dated 14.12.2018 got only two day’s time to file the reply. Ultimately, the petitioners filed their reply on 31.12.2018, wherein they have categorically contended that the provision of Section 179(1) of the Act, will not be applicable to the petitioners, since, the company of which they are Directors is a Public Limited Company and not a Private Limited Company.
2.2 Various Judgments of the High Courts as well as Supreme Court have been relied upon by the petitioners in their reply. It appears that thereafter, by the impugned order passed under Section 179 of the Act the respondents have recorded that the assessee-Company is a closely held Private Limited Company and hence, the Directors are responsible for payment of the outstanding demand and recovery proceedings for the assessment years mentioned therein, as the assessee-Company did not pay the outstanding dues despite several letters which have been issued to the company as well as the Directors.
3. Learned advocate Mr. Arjun Sheth while placing reliance on the judgment of the Coordinate Bench in the case of Padmashi Devji Vithlani. v. CIT (Gujarat) has submitted that the impugned notice as well as the orders are required to be quashed and set aside, since, the respondents have not offered any findings with regard to the characteristic of the assessee-Company despite the assertions made by the petitioners that the company was as Public Limited Company and not a Private Limited Company. It is submitted that neither in the Show Cause Notice nor in the order contains any allegation that the that the company was incorporated with an oblique motive to defraud the public exchequer. Thus, it is submitted that Show-Cause Notice as well as the impugned orders are required to be quashed and set aside.
4. In response to the aforesaid submissions, learned Senior Standing Counsel Mr. Rutvij Patel has submitted that the impugned Show-Cause Notice or orders will not be quashed as the same were precisely passed. It is submitted that upon a search and survey action conducted in the case of Mr. Pravin Kumar Jain and his group on 01.10.2013, it was noticed that the said group through a web of concerns, was engaged in providing accommodation entries of bogus unsecured loans, bogus share application money, bogus sales etc and the company viz M/s Khevana Securities and Finstock Limited had received bogus share application money from the concerns operated by Mr. Praveen Kumar Jain, which ultimately, resulted into reassessment of the Company after reopening for the A.Y 2008-09 and A.Y 2011-12 and A.Y 2012-13. It is submitted that looking to the share allocation it can be held that the company though has incorporated as a Public Limited Company, however,the maximum shares of 96.67% are held by the Directors. Thus, it is urged that the writ petition may not be entertained.
5. Heard learned advocates appearing for the respective parties, at length.
6. Having perused the materials on record, we are of the considered opinion the impugned notices and orders are required to be quashed and set aside on two counts. Firstly, the petitioners have not been offered a reasonable time to respond to the Show-Cause Notice as they were barely having only two days to respond to the Show-Cause Notice dated 14.12.2018, which directs the petitioner to file the reply by 24.12.2018 by 10:30 pm, however, they had received the Notice on 22.12.2018 and subsequently the said reply was filed, the respondent authority proceeded to pass the impugned order under Section 179 of the Act on 31.12.2018. These facts as asserted in the writ petition as well as recorded by the Coordinate Bench in the order dated 31.01.2019, have not been controverted by the respondents.
6.1 Secondly, there is an additional aspect which convinced us in setting aside the impugned Notice and the consequential order. The petitioners have categorically asserted in the writ petition as well as in the reply to the Show-Cause Notice, that M/s Khevana Securities & Finstock Ltd., is a public limited company. However, neither the Show-Cause Notice nor the impugned order has not offered any details to the extent that in reality the company was though a closely held company with all its characteristics of a private limited company so as to attract the provision of Section 179 of the Act. However, the petitioners have not given sufficient opportunity to deal with the allegations that the company was a closely held company and the same was formed or incorporated only with a view to defraud the revenue interest of the State. Furthermore, there is no allegation leveled in the Show-Cause Notice that the company has been formed with an oblique motive to defraud the public exchequer.
7. The Coordinate Bench in the case of Padmashi Devji Vithlani (supra) on an identical foundation of facts about the formation of company has held thus :-
“9. Whether discarding the concept of private and public limited company contained in the Companies Act, 1956 recovery under Section 179(1) can be made from the director of a public company in question. We need not answer in this petition. This is so because even assuming for a moment that it was so, the revenue had to lay a foundation of facts to come to the conclusion, as canvassed before us by the counsel that despite its lag of a public limited company, for the purpose of the companies Act, in reality the said company was a closely held company with all its characters of a private limited company. Even for lifting of the corporate veil as within the narrow confines permitted in the case of Pravinbhai M. Kheni (supra), the foundational facts must be found in the notice giving sufficient opportunity to the assessee to deal with the allegations and present his own material to convince the Assessing Officer to hold otherwise.
10. In the present case, the show cause notice is bereft of any such details. It merely calls upon the petitioner to show cause why tax recovery, which could not be made from the company be not made from him under Section 179(1) of the Act. We would therefore hold that even otherwise, in absence of any previous material indicating that the show cause notice and any bipartite hearing on such issues by the Income Tax Officer, such question need not be gone into. Even from the order under section 179, we do find that the Assessing Officer had based his case of lifting the corporate veil, as was referred to by this Court in case of Pravinbhai M. Kheni (supra) in which, we had observed as under :-
“15. From the above judicial pronouncements, it can be seen that concept of lifting or piercing the corporate veil as some times referred to as cracking the corporate shell, is applied by Courts sparingly and cautiously. It is however, recognized that boundaries of such principle have not yet been defined and areas where such principle may have to be applied may expand. Principally, the concept of corporate body being an independent entity enjoying existence independent of its directors, is a well known principle. Its assets are distinct and separate and distinct from those of its members. Its creditors cannot obtain satisfaction from the assets of its members. However, with ever developing world and expanding economic complexities, the Courts have refused to limit the scope and parameters or areas where corporate veil may have to be lifted.
16. Howsoever cautiously, the concept of piercing of corporate veil is applied by the Courts in various situations. Two situations where such principle is consistently applied are, one where the statute itself so permits or provides for and second where due to glaring facts established on record it is found that a complex web has been created only with a view to defraud the revenue interest of the Stat. If it is found that incorporation of an entity is only to create a smoke screen to defraud the revenue and shield the individuals who behind the corporate veil are the real operators of the company and beneficiaries of the fraud, the Courts have not hesitated in ignoring the corporate status and striking at the real beneficiaries of such complex design.
17. Section 179 of the Act itself is a statutory creation of piercing of corporate veil. Ordinarily, directors of a company even that of a private company would not be answerable for the tax dues of the company. Under sub-section (1) of section 179 of the Act, however, subject to satisfaction of certain conditions, the directors can be held jointly and severally liable to pay the dues of the company.
18. In the present case, however, the Revenue desired to apply the principle of lifting the corporate veil in case of a public company and seeking to resort to provisions contained in section 179 of the Act. In our view if the factors noted by the Assistant Commissioner are duly established, there is no reason why such double application of lifting the corporate veil one statutorily provided and other due to emergent need of the situation, cannot be applied. As noted above, the factors recounted by the Assistant Commissioner in the impugned order are glaring. The company had defaulted in tax for more than Rs.155 crores. Same was unearthed during search operations carried out by the Revenue Authority. The attachment of the assets of the company could lead to recovery of not more than Rs. 5 crores from such huge outstanding dues. The company was formed for taking over business of the partnership. The members of the partnership firm and other family members of the same family became the directors of the company. Shares of the company were held by them and not by any members of the public. The directors had amassed huge wealth in the form of immovable property. The Assistant Commissioner therefore, was of the opinion that the company was only a conduit for creation of unaccounted money and appropriating in directors.
19. If the facts are duly established, we have no hesitation in holding that principle of lifting the corporate veil should be applied. By application of section 179 of the Act, the recovery of the tax dues of the company can be sought from the directors.”
11. In the result, subject to above observations, writ petitions are allowed. Impugned orders under Section 179 of the Income Tax Act, 1961 and the further revision orders are quashed. Rule made absolute.”
8. Thus, the respondent was to incorporate the foundational facts in the show cause notice and in the impugned order showing that the M/s. Khevana Securities and Finstock Ltd is a closely held private company and is not a public limited company, enabling the petitioner to deal with such fact. Hence, the writ petition succeeds. The impugned Show-Cause Notice and order are set aside. The matter is however, remanded to the Assessing Officer to issue a fresh ShowCause notice enabling the petitioner to file their reply within some reasonable time, in light of the observations made by this Court. Appropriate orders shall be passed within a period of 12 weeks after the receipt of the reply filed by the petitioner. We further clarify that the petitioner shall not take inordinate delay in filing the reply and the same shall be filed within a period as specified in the Notice. We also direct the respondent that show-cause notice shall be issued upon the petitioners on the address given in the writ petition. In case of any change in the address, the learned advocate for the petitioners shall inform the same to learned Senior Standing Counsel Mr. Patel.
9. All the consequential orders are hereby quashed and set aside. Rule is made absolute.
